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Under a lump sum contract, also known as a stipulated sum contract, the project owner provides explicit specifications for the work, and the contractor provides a fixed price for the project.
The Target Price Target Price Contracts are based on a cost reimbursable mechanism in which the contractor is reimbursed his costs (on an actual cost basis) subject to the application at the end of the project of a formula which allows the contractor to share any savings made and to contribute towards overspend.
When to Use This Type of Contract A lump-sum contract is a great contract agreement to be used if the requested work is well-defined and construction drawings are completed. The lump-sum agreement will reduce owner risk, and the contractor has greater control over profit expectations.
Disadvantages of a Lump Sum Construction ContractA lump sum agreement presents a higher risk to a contractor. Measuring the number of changes is difficult. Such contracts require paperwork and records of change orders from each phase, and this means further documentation is needed.
Cost plus percentage of cost is a method contractors often use to price services. This type of contract specifies that the buyer must pay all the project costs incurred by the seller, plus an additional amount for profit.